The growth stock bubble

I’m getting tired of using the word “bubble” but what else do you describe this as? From Goldman Sachs:

Premium stocks at a post dot-com peak P/E
Against a back drop where revenues have again disappointed versus I/B/E/S consensus expectations, the most striking feature of the reporting season has been the strong multiple expansion witnessed across ‘high quality’ names

The average 12-m forward P/E of the 10 most premium rated industrials (REA, DMP, NVT, SEK, COH, RHC, JHX, CRZ, BRG & CSL) now sits at 28.2x (Exhibit 1). On average, these names returned 18% this month against a consensus FY2 EPS revision of 1%.

Premium rated stocks are now the most expensive they have been in the post dot-com period (over the past decade, the 10 most expensive names have typically traded at c.22x, 25% below current levels). Their premium to the broader market has expanded considerably, from an average of c.50% to the current 80% (Exhibit 2).

Be careful buying at above 25x
We find that since 2001, buying Industrial stocks trading on >25x forward earnings has generated
an average return of -5% over the following 12 months versus an average annual gain of the market of 10% (Exhibit 3).

A high starting valuation tends to provide an immediate headwind (-4% vs. market over the first quarter) and requires an average holding period of 2-3 years before performance starts to revert and loses are re-captured (Exhibit 4).

In the past, some premium-rated firms have delivered significant outperformance as they grow into their multiples. But on an average P/E of 28x, our analysis shows that c.70% of them have underperformed.